Summary
In the current economic climate, budget-constrained employers have begun to reexamine the design, funding, administration and governance of their retirement plans. A 2008 American Hospital Association survey indicated that about 60% of hospitals with DB plans are expecting increased pension costs. But largely missing from the standard approach to pension design is an assessment of the risks associated with any particular plan design. This paper proposes that plan sponsors add a financial risk management processes when reconsidering plan design. In many cases the level of risk for both DB and DC plans can be managed to a significant extent through more appropriate plan design and funding policies. Some of the principal risk areas to be assessed include long-term funding risk, short-term funding volatility risk and inflation risk in DB plans and longevity risk, inflation risk, funding risk and investment risk in DC plans. One way to meet this challenge is to approach retirement plan design by first developing a basic retirement benefits policy that defines the goals and objectives the sponsor has for the plan. Then the sponsor can apply a financial risk management filter to identify the plan design elements that are most likely to achieve the benefit goals and objectives given available financial resources and subject to potential market fluctuations. The advantage of such an approach is that it identifies the most appropriate design as the one that is most likely to meet the benefits objectives of the plan sponsor subject to its financial constraints.
